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(CEP News) - Australian inflation is on its way down at last, opening the doors for the Reserve Bank of Australia (RBA) to continue onwards with their rate-cutting cycle, economists say.
"There's no real risk of deflation¥it's all around good news," said John Edwards, chief economist with HSBC. Overall inflation dropped by 0.3% quarterly, just above the 0.4% drop expected; while the core trimmed mean inflation rate - more important to the RBA - grew by 0.6%, less than the 0.8% expansion expected. Su-Lin Ong, economist with RBC Capital Markets confirmed: "Inflation has clearly peaked although there may be some debate over the pace of moderation going forward." Negative overall inflation in the fourth quarter was mostly a result of sharp drops in the price of petrol over the last quarter of 2008. The annual trimmed mean rate came in at 4.2% - this is still above the RBA's 2-3% target range but economists agree it won't stay there for long. Stephen Walters, economist with J.P. Morgan said drop-offs in Australian inflation will start to accelerate in 2009. Furthermore, he said inflation is clearly not a key concern for the RBA. ""My point is the reserve bank is really not looking at historical (data)," he said, "they're looking at what's going on globally." The central bank cut by 300 basis points in the last four months of 2008 when inflation was at 5.0% annually - almost double their target rate - he pointed out. Walters is calling on a 100 basis point cut from the RBA next week to 3.25%. Ong agreed a 100 basis point cut is in the works, and today's inflation report only strengthened her case. She said the economy's state is still "precarious," with lower capacity utilization, rising unemployment and the continued global downturn. This means inflation will probably enter the RBA's target band by the second half of 2009, earlier than the RBA was expecting, she said. "We see little in today's inflation report that would prevent another bold 100bp cut." Edwards disagreed: "I do think that RBA is conscious that the Australian economy is doing a bit better than most places," adding the central bank will probably cut by 75 basis points and not 100. By Megan Ainscow,
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